Calling Ahead

Bandwidth has something wireless giants don’t — cellphones that make calls over the Internet.

By Laura Baverman

His cycling team was only a few hours into its cross-country race when a squad of eight riders pulled alongside them. David Morken was leading a group of four amateurs in Race Across America, a 3,000-mile trek from Oceanside, Calif., to Annapolis, Md. The octet consisted of pros competing in a different division of the same event. Morken turned to his friend and business partner John Murdock and issued a challenge: Let’s ditch the old strategy and stay up all night competing against some of the fastest riders in the world for as long as possible. “We had no idea if we’d even survive,” Murdock says. “But we took the risk.” Morken’s men eventually tired and were passed — but not before building a two-hour lead on the rest of the amateurs. That was enough to win their division five days later.

Taking risks isn’t rare for Morken, 44. He proposed to his wife, Chrishelle, 27 days after they met. He started Bandwidth.com Inc. fresh out of the Marines, with little savings and a pregnant wife. Those gambles paid off. Raleigh-based Bandwidth will rake in $100 million of revenue this year, and he and Chrishelle are still hitched and have six children. But not all his risks reap rewards. Two years ago, he attempted to swim the English Channel, something fewer people tackle in a year, on average, than try to climb Mount Everest in a day. He trained for months, planning his daily schedule around two long swims. But four hours of battling crashing waves and 58-degree water was too much. He became hypothermic and had to be rescued.

The experience did nothing to dampen his daring. Bandwidth recently entered the cellphone market by launching Republic Wireless, challenging the dominance of industry giants such as Dallas-based AT&T Inc., New York-based Verizon Communications Inc. and Overland Park, Kan.-based Sprint Corp. — a task many have tried. Few have triumphed. But Bandwidth invested five years of research, millions of dollars and nearly half of its 340 employees to create and launch Republic because it believes it has an edge: It’s the first to offer cellphones that make calls over wireless Internet — or Wi-Fi — networks, drastically reducing the cost of service.

“He’s one of the most impressive people I’ve met in the industry,” says Blair Levin, a Bandwidth investor, former Federal Communications Commission chief of staff and fellow at the Aspen Institute, a Washington, D.C., think tank. “I’m very impressed by the way David and his team have looked honestly at the challenges and tried to make the experience better for consumers.” If the possibilities of this new technology are large, however, so have been the problems. In February, The Wall Street Journal called Republic “mediocre,” lamenting dated technology, dropped calls and lackluster customer service. “Nobody gets it right on the first try,” Levin says, “but they are getting better each time.” They had better, or Republic could sink rather than swim.

Morken was born in Los Angeles to a family that liked to climb — by the age of 18, he had reached the tops of all the Tetons, a range of the Rocky Mountains along the Wyoming-Idaho border. The Morkens moved to New York and then Oklahoma following his father, a professor of government. After graduating from Oral Roberts University in Tulsa, Okla., with a bachelor’s in government, he joined the Marine Corps Reserve and attended Notre Dame Law School. By the time he left South Bend, Ind., in 1994, he was fascinated with the Internet, which had just started to be used for commercial means. He created efiling.com, an online tax service, but had to shut it down after 18 months when he was called up for active duty. While serving as a prosecutor in the Judge Advocate General’s Corps at Marine Corps Air Station Kaneohe Bay in Hawaii, he began competing in Ironman events — but his interest in the Internet never waned. In 1999, he moved his household into his parents’ duplex in Park City, Utah. He had an idea for an Internet company, and his wife gave him 90 days to make a go of it. The plan was to create a matchmaker between businesses and broadband providers, collecting a 2% commission on each connection. “I recognized that any business that wanted Internet access at their address had to call half a dozen salespeople, have long conversations and then receive their proposals. There was no price transparency. You couldn’t understand what was available and what it would cost.”

Bandwidth started with no marketing or sales staff, but the company name led people to its website. He had business almost from the beginning, and three months in — after discovering that if he managed installation, billing and customer service, he could earn up to 24% of a deal — he hired five customer-service representatives, adding staff as sales climbed. Though Bandwidth generated $1 million of revenue that first year, Morken realized he was in over his head. “We had to learn on the job every aspect of the business or we would sink.”

Though he received offers from prospective buyers — $1 million early on and larger ones later — he wanted a partner who could guide him through the growth. One day, after a story about Bandwidth appeared in Forbes, Morken fielded a call from a Chapel Hill man. Henry Kaestner had recently sold Chapel Hill Brokers Inc., an energy brokerage that handled $50 million of daily transactions, for an undisclosed amount. He had money to invest and ambition to enter broadband. Morken figured Kaestner’s experience and connections would give him the operational support he needed. Plus, they shared a strong religious bond. “I knew just like when I saw my wife for the first time,” Morken says. “This is a guy I’d love to be partners with in business.”

Kaestner’s dad, Morken’s college roommate and friends and family invested in the business. Park City was never meant to be a permanent home, so Morken moved his family to Chapel Hill in 2001 to be closer to Kaestner and tap the region’s technology workforce. They set up shop in Cary. The next decade was a blur. In 2003, the company became a broker of voice-over-Internet protocol software, which allows businesses to make telephone calls over Internet connections, eliminating the need for a landline, and sold it on behalf of companies such as AT&T, Sprint and Verizon, collecting a commission. Revenue reached $25 million. Bandwidth registered with the Federal Communications Commission as a competitive local exchange carrier four years later, a process that required licenses in all 50 states and the acquisition of 25,000 high-capacity IP circuits. The move cost about $50 million but allowed Bandwidth to assign phone numbers and route calls, meaning it could sell its own VoIP service. All told, Bandwidth has assigned 35 million phone numbers, including those issued by Google Voice and Skype, which allow free computer-to-phone calling.

As each of his kids entered middle school, Morken made them a promise: Earn straight A’s, and you’ll get a cellphone. One by one, they brought home perfect report cards. By the fourth child, around 2008, Morken’s monthly AT&T bill was approaching $900. “Simultaneously, I was getting faster and better Wi-Fi from the cable company at home and at the office. I thought, ‘Why in the world do I have to pay full price for cellular when most of my family is around Wi-Fi most of the time? How come I can’t make a Wi-Fi call that uses that network?’”

He asked a small team at Bandwidth to study companies that had tried to enter the wireless market. A slew of mobile virtual network operators — wireless providers that don’t own networks — had leased bandwidth from U.S. carriers in the middle of the last decade, offering prepaid phone service on no-frills or branded phones. The cheaper offerings didn’t include roaming, resulting in poor call quality. ESPN and Disney promised exclusive sports or kids features but charged for their phones rather than offering them free or subsidized with a contract. Both failed.

Morken’s team decided those services offered users no enticement — no product differentiation. Wi-Fi would be Republic’s chance to distinguish itself from the crowd. In theory, its handsets would make calls over wireless networks and provide Internet browsing and text messaging. If Wi-Fi wasn’t available, which happens 40% of the time, the phone would connect to a cellular network. The team contacted handset manufacturers to help develop the phone but got the cold shoulder — no one had heard of Bandwidth. So they re-engineered a low-end handset and its operating system, which software developers manipulate to add functionality to mobile devices. (They used the Android operating system because it’s offered free by Mountain View, Calif.-based Google Inc.) At first, they developed a mobile application that could make Wi-Fi calls but eventually rigged the device to make both Wi-Fi and cellular calling native. Bandwidth contracted with Sprint for cell service.

Republic could offer the phone service cheaper than other carriers because Wi-Fi is available in many homes and free in a lot of public places. And because Bandwidth is a competitive local exchange carrier, Republic could issue phone numbers and place calls, so it wouldn’t have to pass along lease fees to customers. Morken and the research-and-development team braced themselves during the beta test, in which a limited number of phones were sold online in November 2011. The phones sold out, and the reviews were positive. Almost immediately after seeing them, handset manufacturers wanted in. “There was a great debate internally about how it would do, from predictions we’d sell a handful of handsets to ‘This will really go viral,’” says Murdock, the company president. “We tapped into a real groundswell, and David gets all the credit in the world for driving it. If you’d pulled David out of that, it wouldn’t have happened.”

A partnership with Libertyville, Ill.-based Motorola Mobility Inc., owned by Google, allowed Republic to develop a second generation of the phone in just nine months, and Republic began selling them through its website last November. Morken expected about 1,000 takers on the first night. More than 100,000 signed up for the service, offered at $19 per month with no contract. “The technology market is all about timing,” says Greg Woock, a former executive with Palm Inc., which developed PalmPilots in the late ’90s, and current CEO of San Jose, Calif.-based Pinger Inc., a free text- and voice-messaging service and Bandwidth customer. “What is super clear to anyone who knows the market is that at some point, you’re just going to have a data connection. While most operators have been struggling to not be a dumb pipe, David seems more interested in being a smart pipe.” (Dumb pipes refer to network operators that can only transfer bytes between the Internet and a customer’s device, while a smart-pipe operator adds value beyond network speed and data exchange.)

Early results proved there was a market for the service, but it also put Republic in a precarious situation. Analysts were intrigued by the innovation and cost but found plenty of problems. Chiefly, Republic’s Android software was antiquated and dropped calls when a user moved out of a Wi-Fi zone and into a cellular one. “I like what they are doing, but for customers that switch to Republic, it’s not going to be a transparent change,” says Jeff Kagan, an Atlanta-based telecommunications analyst. “Customers will have a choice of what is more important to them. If it’s price, Republic fits the mold. But if it’s quality and reliability, it won’t be Republic.”

Morken says his plan is working. Republic now has teams of people focused on marketing and programming, customer service and account management. The division is profitable and will bring in a projected $40 million of Bandwidth’s revenue this year. This fall, it will address many of those early concerns with new handsets that rival the latest iPhone and Android devices in functionality and features. The phones, again developed with Motorola, will be sold on Republic’s website. They will be offered at different price points — the basic phone costs $199 — but still well below the going rate for unlimited Internet, voice and text, Morken says. “I believe it’s a breakthrough experience and one that will more than answer the requests customers have made.”

On a June day, a dozen or so Bandwidth staffers traipsed in after lunchtime, wet with sweat from a game of ultimate Frisbee. Along with most of the staff, they are participants in a monthly challenge to log 20 or more hours of fitness activity. Morken started the campaign after being inspired by two Bandwidth staffers who in July raced the TransRockies Challenge, a weeklong mountain-bike race in British Columbia. This is the first year since 2002 that Morken hasn’t participated in an extreme adventure. “I’ve moved from the actor on a stage to producer or director. I’ve got these young guys so capable and hungry. I’m super excited about giving them this opportunity to encourage the whole company.”

Then again, he’s not done competing. Take the English Channel. Morken says he’ll try again to swim it. But he isn’t convinced that preparation and prowess alone will help him conquer it — or the wireless industry. “When you’re doing new stuff that involves lots of risk, faith provides a bridge during an uncertain present to a bright future. We do so much that is driven by data, but we do so much that is aspirational, and you’ve got to have great faith not just in your colleagues but in your creator.”